Assessing Gold Mines In Far-Flung Places

Cosmos Chiu, executive director of precious metals equity research at CIBC World Markets, doesn’t just stick to mining companies in North America. About one-third of gold comes from Africa, Chiu says in this interview with The Gold Report, so he likes to dedicate a similar amount of coverage to companies there. But knowing what to look for in intriguing districts around the world is what sets Chiu apart—that and his decidedly bullish forecast for the gold price.

The Gold Report: Cosmos, with U.S. economic data putting pressure on gold and silver prices, Moody’s is forecasting an average of $1,100/ounce ($1,100/oz) for gold in 2014 with almost identical all-in gold production costs. Bank of America Merrill Lynch is forecasting an average of $1,150/oz. What’s your view?

Cosmos Chiu: The U.S. economic data is nothing new. Last year certainly wasn’t the best for gold. However, the bad news has already been priced in. We’ve seen some pretty robust U.S. data come out first thing in 2014 and gold prices have held up at the $1,200/oz level.

CIBC has an average gold price for 2014 of $1,350/oz, which is predicated on robust Asian demand for physical gold. An all-in gold production cost of $1,100/oz is pretty realistic from our perspective.

We have wide-ranging coverage at CIBC from gold mining companies to royalty companies. Yes, there will be some companies in trouble. Investors have to be pretty picky about where they invest. They need to focus on the companies that have strong balance sheets and the flexibility to cut costs and focus on the cash cost.

TGR: Most people would say that $1,350/oz is quite bullish.

CC: It’s not conservative. Is it overly bullish? I think it’s doable.

TGR: We will soon see Q4/13 earnings reports from gold producers. Will those reports show investors that gold producers can still perform with gold hovering around $1,225/oz?

CC: We’ve seen glimpses of what Q4/13 could look like through production reports. It’s becoming a market where there are good producers and there are bad producers. The difference is especially visible right now. For the better producers, some will continue to see cash costs come down. We saw that in Q3 versus Q2. I would expect that to happen again. The better producers will continue to make money even at today’s gold price.

TGR: What are some names that could surprise?

CC: Q4/13 is going to be a lot cleaner than what we saw earlier this year with the write-downs. It might even be a little bit boring which, to be honest, is a good thing. Companies will be able to prove that they can make money. It won’t be one of those noisy, messy quarters that we saw earlier last year.

On the lower end of the cost curve, I like Franco-Nevada; it doesn’t really have operating costs at all. It has quite a few accretive acquisition opportunities in the current environment for gold producers.

Osisko fits into a theme of seeking a stronger balance sheet. Things are stabilizing and even optimizing at the Canadian Malartic mine. It’s generating positive free cash flow and there’s optionality. If the gold price environment is supportive once again, and it will be, then there will be a lot of organic growth opportunities within that portfolio. That gives investors that upside potential, as seen by Goldcorp Inc.’s (G:TSX; GG:NYSE) bid.

Eldorado has always been one of the lowest-cost producers no matter how you dice it. It’s got one of the better growth profiles and has a very strong balance sheet.

TGR: Osisko is based in Canada and Mexico. Eldorado is mostly Turkey, Greece, China and South America. Franco-Nevada is everywhere. This is a still a risk-adverse market where most precious metals analysts are sticking to safe mining jurisdictions like Canada, the U.S. and Mexico.

“Last year certainly wasn’t the best for gold. However, the bad news has already been priced in.”

About 30% of your coverage, however, includes names that primarily or exclusively operate in Africa. Why do you lean heavily on equities with key assets in Africa?

CC: I try to give broad coverage to the different areas in the world where gold is produced. Looking at the world, about one-quarter to one-third of the gold production is coming from Africa. A lot of Africa’s production is coming from South Africa. I try to pick out the better or more prospective parts for future growth. Mainly, that’s coming from West Africa.